I worked in Japan for more than 12 years in the eighties and nineties, in Osaka, Nagoya and Tokyo with the U. S. State Department, Citibank and Merrill Lynch. After many more years in China in banking (Deutsche Bank and Ping An Bank) and consulting, I am back in Tokyo conducting the business of Yangtze Century Ltd. (Hong Kong/Shanghai) and producing this blog. E-mail me at smharnerco@yahoo.com.

For Whither Japan readers who may not have seen them, I present below some other analysts’ views on Japan’s economy and market of which everyone should be aware.

Offering the strong medicine first, I recommend that everyone read and listen to the interview with Kyle Bass, founder and principal of Hayman Capital Management, L.P., conducted by CNBC’s David Faber on January 18 ( http://www.cnbc.com/id/100391704). The article bears the headline “Japan’s Debt Time Bomb Is Ticking.”

Bass makes a few key points—which are indisputable facts—and draws what are coldly logical, but horrific, conclusions, as follows:

At 24 times central government tax revenues, cumulative Japanese government debt has reached a level which ensures financial collapse.

With the Abe/Aso government setting a 2% inflation target, the collapse will occur sooner—probably within the next 18 to 24 months.

The implosion will occur from a sudden “swing in expectations” in the market, as the “procyclicality of thought” that for twenty years has convinced Japanese politicians, businessmen, and investors (especially banks and insurances companies) that JGBs are safe changes in a flashing revelation.

The revelation will be that interest on the debt—currently 25% of national tax revenue—will double under higher interest rates.

The result will be massive JGB selling, a collapsing yen, and systematic financial crisis resulting from a collapse in yen asset prices.

According to Bass, while the losses will be greatest for direct or indirect holders of JGBs, all yen assets classes will plunge, including equities. His comment is “people buying Japanese stocks are picking up a dime in front of a bulldozer.’

Not quite as bracing as the prediction above, but equally meritorious, have been the criticisms of Abenomics from world-class economists of which that of Martin Feldstein writing for Project Syndicate on January 17 is representative. Feldstein points out that:

Seeking to boost economic growth, the Abe/Aso government—having suborned the BOJ—may soon destroy their one great advantage : the low rate of interest on government debt and private borrowing.

The yen has weakened 7% against the U.S. dollar in the past month as markets have anticipated the effects of Abe’s policy of reflation. Yen depreciation vs. the Euro has been even greater.

Inflation and a change in JGB investors’ expectations could force BOJ to allow interest rates to rise to be able to sell new government debt and refinance old.

Even without the prospect of faster inflation and a declining yen, as the annual volume of government debt financing needed will soon reach, and probably exceed, the volume of annual private savings available from Japan’s domestic economy, BOJ will have to let rates rise in order to attract foreign JGB buyers.

Feldstein’s analysis (see www.projectsyndicate.org for the article, which includes more data) supports Bass’s catastrophic thesis. And how could it not? The facts are there, and it is very hard to argue against the logic.

Why, therefore, should anyone be relaxed (after the above, I cannot use the term “optimistic’) about Japan’s economic and financial future? Why, indeed, should anyone now, as Bass vividly portrayed it, “pick up a dime in front of a bulldozer?”

The more positive macro case—involving, firstly, Abe’s retreat from Abenomics after the July Diet upper house elections—and the broader positive micro case–involving adjustments throughout the economy, not least by banks further shortening JGB portfolio duration, and moves by Japan’s best corporations to internationalize operations–is not impossible to make. I will continue to make it.

But I cannot dismiss, and I hope readers will duly consider, the alarms being sounded by Kyle Bass and Martin Feldstein among many others. Most of all, I hope these alarms have been heard and will be duly heeded by politicians and bureaucrats in Tokyo.

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In the Book of Revelations, there were signs of The End Times. So for Japan, let us ask what the signs of the End Times are. Recalling the various major financial disasters, only insiders who were not blinded by the loose money splashing around were able to pick up the dollars on the road before the bulldozer shows up. Now we are talking about picking up a dime in front of the bulldozer. Martin Feldstein writes “Japan needs to get out of its no-growth and deflationary trap. But the policies that he favors are not the way to do it.” But, but, but,…Marty. You didn’t say. What is the Way? Even give us signs. The ninja financial bubble came suddenly? The dotcom? the Longterm Capital? Greece? [1] Watch the Monster Japanese Banks. Mitsubishi/Tokyo, Mizuho, Sumitomo, add Nomura, Are these Japanese Banks absolving the new debt of the government quietly without problem? They can technically borrow at next to zero interest from the new BoJ and buy government bonds for Abe. However, they have an international bank to run and make profits with their borrowed money. They are also quite well tied into the cabal of Japanese giants to know good opportunities they can finance globally rather than JGBs. So, if there is no major sign of any of the negatives, the bulldozer is no here, yet. Hey ye experts, please post here if you think this is stupid, and suggest corrections. [2] Japanese private savings is loaded with ridiculously low returns and soon the well will be exhausted. How soon? When will the straw that breaks the camel’s back and some seniors start to cash in their bonds? Line-ups? Experts may have better method of assessing when that tolerance is tempted by higher returns somewhere else. Japanese consumers are incredibly scared of rocking their status quo. In the face of a slow bulldozer, they will not move. When will it’s first crunch make them move? [3] Construction Projects Stimuli. When the Tsunami hit, there was a disaster reconstruction special fund set up. Yet even that was mishandled by the DPJ with 25% siphoned off to other fiefdoms. This is incredible. No official has lost his job. No one has gone to jail. No misdirected fund has been recovered. So this new $126B stimulus will largely be for the same reconstruction work? The same pork powers are there. So watch for actual progress. Also if there are whispers of further pork, it will signal the rug being pulled from under the “stimulus” for shadow private greed storage. If the economy even for the short term does not show sufficient positive effects of Abenomics, watch his popularity plunge. With his majority control, Abe will not have to quit but will drag Japan further along. [4] There are other signs….Reactions of other nations in a currency war, Japanese firms offering to buy Western giants, food prices spiraling up, fight over TPP, island ruckus etc etc.

Or shall I say Zombie firm/bank apocalypse. Isn’t that what Japan is known for?

I think it’s a bit too early to call the end of the world for Japan, since most of it’s deficit financing is done internally rather than externally. Given it’s profound ability to stick it’s head in the sand, Japan may just limp on long after Kyle Bass grew red in the face from screaming at his Bloomberg terminal.

SP. As 007 said:” Never say never”. How long before even the banks and funds and consumers run out of money to lend to the Abe government? “Someth’n gotta give x2″. “Someday, somehow, somewhere..” “Round like a circle in a spiral…”

Ok. You literally cited no figures or mechanism about how this might come about. Your view on Sovereign debt seems a little absolute and more cosmological than realistic. Stephen below answered it better than I could, or would, but I just find the idea that Japan is automatically doomed because of it’s debt-to-GDP ratio absurd. It’s interest servicing costs that matter the most and a bound and determined central bank can keep those low if it wants to. Now we can argue hypotheticals, but no one really knows what determines a crisis point. If we go off market signals aka rates then Japan has quite some time left. Now if it achieves the objective of increasing NGDP and therefore incomes then it’s ratio becomes lower and revenues would rise.

Maybe I’m missing something, but I just don’t see how this is so easy of a call. Many bears have tried and failed long before you.

JGBs top holder, over 70%, are the BOJ and Japan’s banks and financial institutions (which are required by law to have JGB holdings). Then its Japanese public pension funds. Japanese households hold around 5% of total JGBs, and sovereign debt (foreign holdings) are a little more than 5%.

The fact is JGBs offer terrible returns, demand for them has always been very insular to Japanese banks. Foreign investors in JGBs are largely foreign governments. The vast majority of JGB holding are in institutions that simply can’t legally sell their JGB holdings.

The debt-to-GDP ratio is a complete red herring statistics that fool just the worst economists.

Japan has paid dearly for its excessive JGB issuing in the form of a stagnant economy. Money that should have been working in the economy, which Japanese banks should have been lending out, essentially have become tied up in JGBs instead.

I take it you’re not very familiar with Kyle Bass. He’s just another Austerian, rich guy, doomsday prepper, most famously portrayed in the Michael Lewis book “Boomerang.” As for Marty Feldstein, he’s impossible to take serious after his dreadful interview in “Inside Job.”

Both Bass and Feldstein have already addressed these issues. You really should take the time to read Feldstein’s piece and watch the Bass presentation (the longer version not the CNBC version) before commenting because you’re regurgitating outdated talking points here.

so the third largest economy in the world goes down in flames….hint, this won’t be like Greece,this is major, this will drag down the world with it. Everyone seems to think ” yeah cool I’ll get a Lexus for 10 K” like we’re going to be insulated…..this is the begining of the great deflationary wave of sovereign default….THERE IS TOO MUCH DEBT THAT CAN’T BE REPAID….A LOT OF FOLKS WILL DISCOVER THEY HAVE A LOT LESS MONET THAN THEY COUNTED ON